The Lowdown on Student Loans
If you are a senior who has finished or in the process of finishing your college applications, you want to make sure to fill out one more piece of paperwork: the FAFSA.
The Basics of the FAFSA
FAFSA stands for Free Application for Federal Student Aid, and “free” is the key word. Since it’s a free service and may result in financial aid of some sort (federal loans, grants, or scholarship), you definitely want to complete this straightforward form.
The Department of Education provides $150 billion each year in grants, work-study opportunities, and federal loans to over 14 million students. Such federal aid includes the following:
- Federal grants include the Pell grant and Federal Supplemental Educational Opportunity Grants (FSEOG). You must be able to demonstrate financial aid and do not need to repay this type of aid.
- Direct Subsidized Stafford Loans: You must demonstrate financial need to be eligible for subsidized loans. Interest for these loans does not begin until six months after you graduate, provided you attend school at least part-time.
- Direct Unsubsidized Stafford Loans: You do not need to demonstrate financial need. Interest for these loans begins when the loan is distributed, while you are still in college.
- Perkins Loans: You must be able to demonstrate exceptional financial need, and not all schools participate in the Perkins Loan Program.
- If you can demonstrate financial need, the work-study program offers part-time employment while you are enrolled in school.
If you’re not ready yet to fill out the FAFSA, you can still get an estimate for the amount of federal aid you may be eligible to receive using the Department of Education’s FAFSA4caster. To receive the most accurate estimate of the aid you may receive, you will need to know your family’s adjusted gross income from their tax forms, as well as the value of their financial and non-financial investments.
The Skinny on Interest
Federal loans are a somewhat different animal from private loans. There are two types of federal loans: subsidized and unsubsidized. Subsidized loans do not accrue interest while the student is in school, provided the student is studying at least part-time. Students with subsidized loans are also given a grace period of 6-months after graduation before the interest kicks in. Students must have demonstrated financial need to be eligible for subsidized loans, but no financial need is necessary for unsubsidized loans. The downside to unsubsidized loans is that you start paying interest as soon as the loans are distributed. Both subsidized and unsubsidized Stafford loans currently have an interest rate of 3.86% with a loan fee of 1.05%, and the interest rate is set every year by Congress. Perkins loans, on the other hand, have an interest rate of 5%.
An interest rate of 4.91% seems low, but an example will help show the compounding effect of interest. Let’s say you are awarded a $10,000 subsidized federal loan. A subsidized loan will accrue no interest during your time in school, but in year 5, assuming you graduate in 4-years, the amount you owe will have grown from $10,000 to $10,491. By contrast, an unsubsidized loan of $10,000 begins accruing interest in year 1 of school, so by year 5, the principal will have increased to $12,708. Clearly, if you can get subsidized loans, you will save significantly on interest.
While we’re on the subject, we might as well delve into the world of private loans. You definitely want to read the fine print and ask the right questions for all types of loans, and especially private loans. Federal loan interest rates are set by Congress, but variable rate plans for private loans are set by the credit card companies. One company’s undergraduate loan option boasts a current variable rate of 3.25%, which is much lower than the federal 4.91% rate; what the company doesn’t share is that the variable rate could jump as high as 18%! Since 2008, the interest rate has remained low, around 3%, but you definitely want to pause before signing up for a variable rate loan. If you are willing to take the risk of potentially paying higher (or lower) insurance rates in the future for today’s 3.25% rate, then you may want to consider private loans in addition to the student aid the government and your school provides.
Finding Scholarships Made Easier
In addition to filling out the FAFSA to see if you qualify for federal grants, loans, or work-study programs, you’ll also want to see what scholarships are within your reach. In the past, students had to engage in a time-consuming scavenger hunt to find scholarship opportunities that applied to them. Now, you can download the Scholly app to do all that work for you. Simply input your information and Scholly will match you with scholarships that match your criteria. You still have to fill out the application and essay, but many scholarships ask very similar questions about leadership, service, etc. As you go looking for scholarships, keep in mind that the ones with the most zeroes tend to be the most competitive, so don’t pass over a $250 or $500 scholarship if it matches your criteria.
For answers to more specific questions, be sure to visit StudentAid.